A tweak in the schedule is worth two in the bank

So you’ve just received your DA & CC consent and it’s almost time to start building.  Just how long will the construction phase of your development take? Or more importantly, the question is how long before you start making a return on your investment?  I guess this is like asking, how long’s a piece of string?  Because the answer will depend on many factors;

-   The number of dwellings you are building – single house or multi unit development?

-   The type of construction process; slab and brick, timber floor and walls, partially prefabricated materials etc  

-   The size and degree of difficulty of the structures.

-   The weather; how many rainy days will delay progress? 

-   Material and contractor availability.

-   The builder’s ability to manage his contractors – his relationship with his trades and communication skills.

-   The knowledge and experience of those managing the project.

-   Any issues that may arise during the development process i.e. hitting rock when excavating.

Generally speaking, the build phases on Property Bloom projects range from a dual occupancy being completed within four months to a four villa project being completed in six months.  Our granny flat developments are only two months from receipt of approval to completion of building works.

Now you have an idea on how to estimate your build time...is there a way you can save on holding costs too?  The answer is yes and it’s all about analysing your building drawdown schedule.  A simple revision to a builder’s drawdown schedule can end up saving a considerable amount of money in interest holding costs.

Typically, my builder’s drawdown schedule would go something like this for a dual occupancy development....

Deposit – $5,000 due when signing the tender (before DA is lodged)

Slab Less deposit paid – 20%

Frame & Trusses – 20%

 Lock up – 25%

Mould out – 25%

Completion – 10%

By requesting a change of just a few percentages over each phase we can save thousands of dollars for our clients.  This was our proposed change to the schedule:

Deposit – $5,000 due when signing the tender (before DA is lodged)

Slab Less deposit paid – 15%

Frame & Trusses – 20%

 Lock up – 20%

Mould out – 25%

Completion – 20%

This is a much better schedule for our clients as there is more to be paid towards the end of the build.  Not only does this save on interest costs, but it keeps the builder ‘in the game’ as there is more for him due at the back end of the build.

 If I was really good at maths, I could calculate the exact amount saved be tweaking the percentages....but alas, I’m not that clever.  So here is a challenge for all you clever readers... 

Assumptions:

Build cost and construction loan is $500,000,

Total build time frame is five months from slab down.

An equal amount of time between each phase, although not likely, just to make it easier to calculate.

Interest rate 7%.

Can you tell me what would be the difference in interest payable for each scenario?  I look forward to hearing from you. Please email your answers to: jo@propertybloom.com.au

Systemise the Success of your Development

This week I created a system.  My aim was simple; to achieve more in less time.

I had decided to set up a meeting with one of my builders.  The builder and I only started working together fairly recently when I introduced this particular type of development earlier this year, and  over a short period of time we were now up to our sixth project.  I knew we could fine tune our process.  He’d had some recent staff changes so it was the perfect time to gently tell him exactly how I wanted my developments to run. 

Before the meeting yesterday I’d prepared a draft Procedures document which was based on the way we had been doing things up until then.  

But it wasn’t until I started documenting pretty much everything we did that I realised how much was involved in this somewhat basic development strategy.  What started in my mind as a one pager has turned into four. It’s funny how we simplify in our minds a process because we’ve done it time and time again.  But when you really break it down in writing, you can see all the fine details.

Using a System or Procedure keeps me on track with our projects...I now literally have a written system for everything I do.  It gives me something tangible to show to my clients and helps explain exactly what Property Bloom really does when managing their development.   It’s also an important tool to use when training new staff as they have a documented procedure to follow.  

By the end of the meeting with my builder, we had agreed on a three very important changes that will impact the bottom line of my developments;

1.       We changed our standard floor plan slightly to make it more cost effective to build, without reducing the size. Now I could offer my clients a cheaper build price that will not impact on the end value or rental return.

2.       We changed the payment schedule so my clients would pay less in the first half of the build phase, saving them valuable holding costs.

3.       We minimised choice to save time. By setting up standard inclusions plus a list of ‘optional extras’ it meant that clients would not feel overwhelmed by choice on fittings, fixtures and colour selections and we could manage this process faster moving to the next step and saving time.

I was happy with my new system and excited to put it into action immediately and already we are getting more done, in less time.  Because as they say...time is money.

Fast Track your Development by using a Project Manager

I often get asked what I do for a living.  My ‘elevator pitch’ or quick answer is…” I help people develop property by managing all the details from finding the right site through to finding the right tenants on completion.  The result is creation of a large amount of equity through the development process.”

Their next question is always…why don’t you just develop property for yourself? 

The answer to this is a bit longer, but to keep it short and sweet… I love sharing knowledge and find it very satisfying project managing developments.  I do have a stake in all our developments anyway, as I share in the equity we create.  This means I take personal ownership of the developments. Over the past 8 years the number of developments Property Bloom has managed stands at 53. This is on average of 6.6 developments per year.  Also, the bottom line is that there is no way I could finance 53 developments on my own.  By doing them for others, I get to do what I love and make a living from it. No brainer really.

So what are the benefits of using a professional project manager for your development? 

Save money; a good project manager will have established discount structures in place with builders, architects, surveyors and other contractors.  On a 3 villa project, the builder’s discount alone saves our clients over $12,000. On a 6 villa project we’re saving them well over $30,000. These savings help offset the project management fee.

Save time;  To set up your own development team, find the right site, run feasibilities, design the project, manage the planning phase and then the build phase for even a small dual occupancy can be very time consuming. If you are trying to hold down a full time job at the same time, you will find it challenging. Using our refined system, we fast track all stages of the project for clients. 

Minimize risk; if it’s your first development then just one error may mean the difference between a profitable development and a non-profitable one. Using an experienced PM takes some of the risks away. Developing will always have an element of risk, every development is different and we’ve learnt something new from each one we’ve finished.

Learn how to develop; simply by going through the process whilst working with a PM you will learn so much. If you engage a PM that is happy to teach you along the way, then you may be ready to manage your next project on your own.

Access to sites not on open market;  our sources know what we’re looking for and will contact us about sites they may have available or have coming up.  About 50% of our sites have not hit the open market.

Professionally managed & recorded; the paperwork alone can be mountainous and you want to ensure all documents are kept to maximize your tax return and so you can use them as a reference when doing your own project.

Local knowledge and experience; Property Bloom specializes in the Lower Hunter Region of NSW. So we know the markets very well and can quickly analyze a potential site location. Our contact base of agents, contractors, builders, professionals is broad and we have been able to weed out any suppliers we have not been happy with in the past. We continue to fine tune and improve our systems and processes.

Keep your day job;  cashflow is important when developing so all of our clients have day jobs to fund their developments. It enables them to keep moving forward with building their property portfolios.  We often have clients running two projects simultaneously to fast track their wealth creation.

If you’re thinking of developing but are a little worried, work with a project manager who has local knowledge and good experience in the area you want to develop in. You’ll essentially be buying yourself the time and experience it would have taken you to get up to the same level.

To Sell or Not To Sell...that is the question

Even before you start looking for your development site, you’ll need to clarify one thing.  Are you developing to sell or to hold?

To answer this question, you may need to answer another...

 Is your strategy short or long term?  If it is short term, then selling may meet your needs to make a quick return on your investment. If you have a long term strategy to build up a property portfolio, then holding will be the way to go.

There are several factors that will influence your decision:

Location

Your development is in an awesome location but in a poor rental market.  An example of this may be a coastal area where there may be higher demand from owner occupiers wanting to purchase low maintenance property to retire to. In this case you may sell to realise your profits as holding would not be viable due to low rental returns.

Timing

If you complete your development and the market is in an upswing with high demand, then you may get a higher than anticipated sales price. So this may influence you to sell. But if the market is down and there is an oversupply of property, but a tight rental market, then holding may make sense.

Interest Rates

An important factor in calculating holding costs is interest. If interest rates are around 6.5% as they are now yet the rental yield is around 8% in the area you’re developing in, then holding the properties makes good sense. You may look at fixing rates for a few years, to take the risk of rates rising out of the scenario.

Taxation

You need to discuss your personal and/or company tax situation with your accountant before starting to develop property. There is capital gains tax to consider when selling as well as GST implications when selling brand new dwellings. These alone may sway you to hold. You also need to check on land tax to see if this will affect you if you decide to hold.

Most of Property Bloom clients develop to hold.  This is because they choose to access the equity – which is created through the development process - through refinancing on completion.  This means they don’t have selling costs like agents selling commission, capital gains tax and GST.   Once refinanced, they can pull some equity out of the development if they choose.

Another deciding factor in holding is in the areas of the Hunter Region we develop in, we are getting very strong rental returns. We find that we can maximise the rent because the villas are new. Tenants do pay a premium to live in a new dwelling. Also the vacancy rates are less than 1%.  The gross yield on completion can be as high as 9%. The yield does also depend on the size of the development.  A three villa project will have a higher yield than a dual occupancy. 

Another reason our clients hold is take advantage of the high depreciation benefits they receive on the new dwellings.  On a typical dual occupancy, our clients are receiving around $17,000 in year one (based on Diminishing Value method). If you are paying lots of tax, then this is definitely one of the rewards of holding.

The final reason Property Bloom clients hold is because they want to build up a retirement fund and take advantage of future capital gains. In the suburbs we develop in, there is high potential for capital growth because of many factors including increased population, projected housing demand in the council’s Regional Strategy, spend on infrastructure and the benefits that the coal mining industry bring to these towns.  The long term growth figures are over 12%.  So if a client can create around say $80,000-$120,000 in equity through the development process AND then holds for ten years, they stand to receive 12% growth on average, each year.  The future value of their development will be considerable.

Whatever your strategy, make sure you put down a solid plan that you feel comfortable with and set up a professional team to help you achieve your goals.